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The Union government’s proposal to re-introduce long-term capital gains tax (LTCG) on equities and equity-linked securities such as mutual funds jolted the stock market on Thursday.

In its current form, the government has proposed a 10% tax on gains of more than Rs 1 lakh from investments in listed securities exceeding one year. However, all gains till January 31 this year will be exempt from LTCG.

The tax on short-term capital gains (gains on investment less than a year) remains unchanged at 15%.

The BSE Sensex and the NSE Nifty had opened just a tad higher and gained as much as 0.7% in the first hour of trade. The indexes then oscillated between red and green while finance minister Arun Jaitley delivered his budget speech for 2018-19. By 12:45 pm, both indexes had lost their early gains and were down as much as 1.3% after Jaitley’s LTCG announcement. The indexes recouped the losses to trade higher again within the hour, but eventually closed lower.

The Sensex closed at 58.36 points at 35906.66, while the Nifty was down 10.80 points or 0.10% at 11016.90.

The pattern was similar in the broader markets, with the BSE Midcap index closing the session down 0.54% and the Smallcap index closing flat amid a volatile session.

The possibility of LTCG being re-introduced was discussed in the build-up to the budget, but some market participants were hoping that the finance minister wouldn’t drop the bomb in his final full budget.

In the aftermath of the announcement, the Street remained divided. A section of the industry believes it will have a negative impact on investors’ sentiment.

However, some participants feel that LTCG would benefit both the government and end investors, as equities will remain the most efficient asset class to grow wealth compared with other asset classes such as gold, fixed income and real estate.

The re-introduction of LTCG will reduce the attractiveness of arbitrage funds as a substitute to liquid schemes will diminish due to the 10% dividend distribution tax (DDT) on dividend income as well as 10% LTCG.

Nishant Agarwal, managing partner and head – family office, ASK Wealth Advisors said that the Budget had shocked investors by taking a bitter pill.

“Grandfathering of gains will prevent any churning or misalignment of investments for tax planning purposes,” Agarwal said. “But the other big impact for investors will be introduction of 10% DDT in Dividend income derived from Equity Funds. This will bring them at par with LTCG and dividend tax paid for direct equity holdings and will have a negative impact on MFs.”

The Sensex has risen more than 33% since the start of 2017, with the gains largely attributed to the flow of household savings into domestic institutions such as mutual funds.

Mutual fund buying of Indian equities stood at a record Rs 1.13 lakh crore from January to December 2017, Bloomberg data showed. It was the first time in roughly 13 years that domestic institutions surpassed foreign institutional investors’ investment in equity markets.

Rashesh Shah, chairman and CEO, Edelweiss Financial Services Ltd. said the markets like stability and hence a better option would have been extending the period for LTCG to three years. “Having said that, re-introduction of LTCG will not have a huge impact,” he added.

The UPA-1 government had removed LTCG and introduced securities transaction tax (STT) in its first Budget in 2004.

Ace investor Ramesh Damani pointed out that India is among the few markets that now has both tax regimes on stock trading.

“There is bad news for retail investors and domestic investors. From making it efficient, we are making it a bit inefficient. The good news is the grandfathering clause till 31 January as it would prevent volatility in the market. But LTCG [coming] back will bring in a lot of bureaucracy back into the tax network,” Damani told CNBC-TV18.

In his fifth and final full budget before the 2019 general elections, Jaitley eased the fiscal deficit target and announced a series of measures to boost health, education, agriculture, social security and infrastructure in what could be seen as a largely populist budget.

Mahindra & Mahindra Ltd, India’s largest tractor and utility vehicle maker, gained 4.5%. Kaveri Seed Company and Jain Irrigation surrendered early gains to end in the red.

“I will give this Budget a score of seven out of 10. On rural focus it scores a nine, and from salaried individuals and financial investors’ perspective it’s a five,” said Nishant Agarwal, Managing Partner, ASK Wealth Advisors, a Mumbai-based advisory firm that caters to ultra-rich individuals and families.